Liz Coyle: Liberté! Fraternité! FCA!
Over the past 12 months, it would be fair to say the UK has been through a rocky patch in its relationship with Europe. Both have been through tumultuous times domestically, with elections held in France, Germany, Holland and the UK since the start of 2017, while our relationship was irrevocably altered when the UK voted to leave the EU in the June 2016 referendum.
Theresa May's triggering of Article 50 on 29 March was the start of our formal ‘divorce' from the EU but the result of last month's General Election has cast doubt over whether the UK's approach will be for a ‘hard' or a ‘soft' Brexit now we have finally reached the negotiating table.
The Financial Conduct Authority (FCA) currently has no more insight than the rest of us about what the long-term, post-Brexit, future will bring or the effect it may have upon UK financial services firms. Until more details are available, it has released a holding statement which simply says: "Firms will need to assess the impact a changed relationship with Europe and any changes to the regulatory regime have on their business models."
The Brexit negotiations will take years to complete and I am sure that, as more information about the potential ramifications for UK advisers transpire, the regulator will keep us updated. Until then, it is worth summarising what we do know will be happening to UK regulation over the next few years as a result of changes to EU legislation.
First up is the piece of legislation that will have the widest impact on UK advisers - MiFID II. Some of the hottest topics covered by this legislation are;
* Assessing suitability: Following a thematic review last year, disclosure is firmly in the regulator's sights, with a particular focus on the clarity of adviser charging structures and timescales. Methods of charging that look set to come under the most scrutiny include ongoing services agreements, open-ended initial charges, hourly rates and tiered charging structures.
A big change, of which we are already aware, is that suitability reports will need to be issued whether or not a transaction has been made. Advising a client to take no action will be classed as giving advice and the relevant information issued to clients.
* Structured deposits: In order to maintain independent status, structured deposits will need to be considered during the advice process, which means advisers who do not currently hold the relevant permissions for this market will need to apply to the FCA for a variation. If your application is made before 3 January next year, there will be no cost for the change - if the application is made after that date, however, there will be a charge.
* Definition of independence: It sometimes feels not even Thomas Jefferson and his ‘Committee of Five' could have spent as long debating the meaning of independence back in 1776 than the financial services sector has over the past few years.
Nevertheless, MiFID II will be delivering yet another definition - and one that may be preferable to many of you who do not feel comfortable operating on the very niche edges of the investment spectrum. Instead of the current requirement to deliver a ‘comprehensive analysis' of the market as part of your advice process, you will instead need to deliver a review that is ‘sufficiently diverse'.
Although this sounds as though it might mean a relaxation of the need to consider the entirety of the market for each client, we still need to discover how it will relate to actual black-and-white guidance. In addition, there will be a number of investments that, under MiFID II, will be classed as retail investments, such as shares, bonds, derivatives and, as mentioned above, structured deposits.
Although we are yet to see any definition of independence have a measurable impact on consumer perception, at least this change may have a positive outcome for the streamlining of the advice process of independent advisers.
One encouraging aspect we have seen with regard to the translation of MiFID II legislation into the UK is that the FCA has not been afraid to exercise common sense when some of the regulation does not work for UK markets.
As an example, up until quite recently, it seemed likely call recording was going to be introduced, as part of the MiFID II legislation. A survey we conducted among our member and client firms, along with feedback we received at events, told us this was something advisers were very strongly against, and we submitted a response to the FCA representing those views.
We were therefore delighted when the regulator announced it was not going to introduce call recording as a requirement for UK advisers and, instead, would accept written notes as a substitute from non-MiFID firms.
Although MiFID II is the biggest hitter approaching from Europe at the moment, there are a number of other reviews headed our way through the year that will also have an effect - albeit maybe a lesser one. These include:
* The fourth anti money-laundering directive: In place from 26 June this year, the new anti money-laundering directive brings new procedures into place surrounding customer due diligence, politically exposed persons and operating a risk based approach to money laundering queries.
* General Data Protection Regulation: The GDPR will be implemented across Europe from May 2018 and will affect all businesses, working in every sector.
* Packaged Retail and Insurance-based Investment Products (PRIIPs): Again focusing on disclosure, PRIIPs will be in place from 1 January 2018 and will involve firms that advise on these products putting a new Key Information Document process in place.
* IDD: This aims to strengthen the regulations previously implemented in the Insurance Mediation Directive (IMD) in 2005. It will take effect on 23 February 2018, and concerns the distribution of insurance (and reinsurance) pre- and post-sale.
Clearly the UK financial advisory space is in for a shake-up over the coming months. In order to stay on the right side of the regulator and ensure you continue to serve your clients in the best way possible, I recommend keeping a watching brief on the FCA's website.
I will of course be keeping you updated in this regular slot too - so watch this space …
Liz Coyle is compliance policy manager at The SimplyBiz Group